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More Relief Funding; Finally Some Guidance for Self-Employed Individuals Trying to Get a PPP Loan

April 28, 2020

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) in to law to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic. The CARES Act permits the U.S. Small Business Administration (the “SBA”) to 100 percent guarantee loans under a new program titled the “Paycheck Protection Program” (the “PPP”), with the full principal amount of the loans and any accrued interest qualifying for loan forgiveness under specific circumstances. The intent of the program is to provide immediate relief to small businesses. For more details on the PPP read this.

The initial funding for the program was depleted in a couple of weeks; however, on April 21st, the Senate passed legislation, the Paycheck Protection Program and Health Care Enhancement Act, authorizing an additional $310 billion for the PPP and $10 billion for the Economic Injury Disaster Loan grants. The House is expected to vote on the legislation Thursda, April 23rd before it’s sent to the President for signature.

To be eligible for the PPP the organization must be a small business with 500 or fewer employees, or specific private non-profit organizations and veteran organizations. The small business category includes sole proprietors, independent contractors, and self-employed persons. Individuals with self-employment income are eligible if: (i) the business was in operation on February 15, 2020; (ii) your principal place of residence is in the United States; and (iii) you filed or will file a Form 1040 Schedule C for 2019.

Recently, the SBA issued additional guidance, in the form of an Interim Final Rule, for individuals with self-employment income who file a Form 1040 Schedule C. The maximum loan amount under the PPP is the lesser of the business’s average total monthly “payroll costs” during the one-year period prior to the loan being made multiplied by 2.5 or $10 million. Generally, payroll costs are what you pay your employees plus employee benefits with some exclusions and limits. For self-employed individuals, the new guidance defines “payroll costs” as their net profit, or $100,000, whichever is less. This could be troubling to individuals who have been successful at minimizing taxes by maximizing their expenses, because the amount that they are now able to borrow from the program may end up being very low, or zero.

To calculate the maximum loan amount for sole proprietors, independent contractors, and self-employed persons with no employees, follow the steps below:

  1. Use your 2019 IRS Form 1040 Schedule C line 31 net profit amount. If you have not filed your 2019 return, complete a draft of the Schedule C to compute the value. If the amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a loan under this program.
  2. Calculate the average monthly net profit amount by dividing the amount from Step 1 by 12.
  3. Multiply the average monthly net profit amount from Step 2 by 2.5.
  4. Add the outstanding amount of any Economic Injury Disaster Loan made between January 31, 2020 and April 3, 2020 that you seek to refinance, if any, less the amount of any advance under the Economic Injury Disaster Loan.

Those who are self-employed with employees, can also follow the steps above but are allowed to add the following to the amount calculated in Step 1:

  • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States (limited to $100,000 per employee), and
  • 2019 employer health insurance contributions, retirement contributions, and state and local taxes assessed on employee compensation.

As evidence of the amount you are able to borrow, the following must be included with your loan application.

  • For self-employed individuals without employees, include your 2019 Form 1040 Schedule C, or a draft if you have not filed your taxes.
  • For self-employed individuals with employees, include your 2019 Form 1040 Schedule C, or a draft if you have not filed your taxes; and Form 941 and state quarterly wage unemployment insurance tax reporting forms, along with evidence of any retirement and health insurance contributions, if applicable.
  • Other documentation may also include any 2019 IRS Form 1099-MISC detailing nonemployee compensation received, invoices, bank statements, payroll statements, or other records establishing that you are self-employed and the business was in operation on or around February 15, 2020.

The interim final rule is clear that a 2019 Schedule C must be included to apply for a PPP loan although 2019 tax returns are not due until July 15th. While the guidance allows for applicants to submit a draft of their 2019 Schedule C if they have not filed their return, this may still present a significant inconvenience to self-employed individuals, as they will have to prepare or have this form prepared as quickly as possible.

Ultimately, the SBA’s new guidance may present difficulties for a large segment of the self-employed causing many to receive lower loan amounts, while others may no longer qualify. It also adds an additional requirement, the preparation of a 2019 Schedule C, that may consume already limited time and resources amid the tumultuous COVID-19 storm in which many find themselves.

An overview and comparison of the PPP and the Economic Injury Disaster Loan programs is available here. If you have questions or concerns about the PPP, please reach out to Yolanda N. Davis at Nexsen Pruet.


Our insights are published as a service to clients and friends. They are intended to be informational and do not constitute legal advice regarding any specific situation.

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